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Verizon and Netflix Lock Horns Once Again in Net Neutrality Battle

Both Verizon and Netflix continue to hotly debate the issue, but ultimately, it's up to the FCC to decide how the Internet should be regulated.

Say what you will about telecom giant, Verizon(NYSE:VZ)-- just don't call the company a monopoly. At least that's what Vice President for Public Policy David Young said in a blog post, headlined "Dispelling the Myth of a Terminating Access Monopoly."

The post responds partly to claims from Netflix(NASDAQ:NFLX)that companies have no choice but to pay Verizon, Comcast, and others for direct access to their networks, because the major ISPs rarely compete against each other. According to Netflix, that gives each broadband company domain over large parts of the U.S.

Verizon made it clear in its blog post that it disagrees with that notion. The company said it has filed a declaration by Janusz Ordover, former deputy assistant attorney general for economics in the Antitrust Division of the U.S. Department of Justice and antitrust specialist Andres Lerner, "confirming that there is no 'terminating access monopoly' for wireless broadband."

The document also declares "there is no terminating monopoly in the case of Verizon's wireline broadband services, including Verizon's FiOS broadband service, since these services face near-ubiquitous competition with next generation cable broadband."

The document was commissioned by Verizon and made available to the public here.

It's bigger than just two companiesThe Netflix/Verizon dispute is part of a larger argument about exactly how open the Internet should be. The Federal Communications Commission has been carefully studying the issue. While it has not officially announced its intentions, Chairman Tom Wheeler suggested during a panel discussion at the 2015 Consumer Electronics Show earlier this month that he supports regulating broadband providers under Title II of the Communications Act of 1934.

Wheeler said Title II appears to offer the "best protections" for consumers. He dismissed any idea that using Title II would harm ISPs or disincentivize investment in their networks by pointing out that the wireless industry has thrived even under that same classification.

"For the last 20 years the wireless industry has been monumentally successful -- hundreds of billions of dollars of investments as a Title II regulated [industry]," Wheeler said. There's a way to do Title II right, he explained. "The model has been set in the wireless business."

Using Title II to ensure an open Internet would classify the ISPs as utilities, thus subject to stricter regulation, which the Internet providers have vocally opposed.

What is Netflix saying?Netflix has been a vocal supporter of true net neutrality and filed comments with the FCC on the subject. The document spans 25 pages, but Netflix summarizes its thoughts at the end:

Netflix believes that achieving strong net neutrality is critical to maintaining a vibrant, open Internet to promote free expression, diversity of content, and continued innovation. ISPs should not impede, favor, or charge Internet services that consumers choose to use. To prevent this, the Commission should adopt clear enforceable antidiscrimination and no-blocking rules for the last mile. The Commission also must require ISPs to provide sufficient interconnection to cover the capacity demanded and paid for by their customers, without charging access tolls to online content providers.

It needs to be stated that in the same way Verizon's study supports its goals, Netflix's document comes out strongly in favor of what would benefit the streaming video provider. Of course, the difference is that Netflix makes it clear it is offering an opinion, while Verizon is attempting to pass off a study it paid for as unbiased research.

Verizon's responseVerizon's document contends that it is not a monopoly in its territories, because it faces competition from cable companies that also offer broadband Internet access. In many cases, that's true. Verizon is usually one of two choices for consumers -- giving it a duopoly, not a monopoly.

Because it has at least one competitor, Verizon dismisses both Netflix's claims and the FCC's rationale for regulating ISPs at all.

"The lack of a 'terminating monopoly' eviscerates the case for Title II reclassification. When these economic considerations are added to the many other legal, factual, and public policy arguments against Title II regulation, the risk of pursuing the radical Title II path becomes all the more clear," Young wrote.

What will happenWhile Verizon might not technically have a monopoly, the major ISPs have generally worked together. If consumers had real choice, then at least one major broadband provider would not have forced Netflix into paid interconnectivity deals.

However, all the big boys -- Time Warner Cable, Comcast, AT&T, and Verizon -- have forced the streaming service into these deals.

Calling Verizon a monopoly is wrong -- in most cases it is a duopoly in unofficial collusion with its competitors.

The FCC, however, most likely understands that Verizon's study shows little more than what the company wants it to. Title II means an end to a revenue stream for ISPs, since deals like the paid interconnectivity contracts with Netflix would be illegal under the policy.

Netflix is arguing what's best for Netflix as well, but in this case, the streaming company's interests largely align with those of the public.

Wheeler seems to agree -- and he clearly believes history shows Title II won't be bad for Verizon and the other ISPs.

Daniel Kline has no position in any stocks mentioned. He does not recall ever successfully finishing a game of Monopoly. The Motley Fool recommends Netflix and Verizon Communications. The Motley Fool owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Author

Daniel B. Kline is an accomplished writer and editor who has worked for Microsoft on its Finance app and The Boston Globe, where he wrote for the paper and ran the Boston.com business desk. His latest book, "Worst Ideas Ever," (Skyhorse) can be purchased at bookstores everywhere.
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